During this time, businesses are doing everything they can to stay solvent.  The Federal Government is helping with Payroll Protection Program(PPP)  and Emergency Injury Disaster Loans (EIDL). Of course, with any government program there are hidden strings. 

With the PPP, companies apply for loans based on payroll and any EIDL loans received.  The goal is to keep employees on the payroll.  The loan is forgivable if 75% of the loan is used for payroll.  Aside from payroll, this loan can be used or utilities and internet access.

The EIDL is applied for on the SBA website and the company will get an advance of $1,000 per employee up to $10,000.  EIDL repayment will be deferred for 12 months.  The EIDL can be used for Accounts Payable, Inventory and certain other Operating Expenses in the first eight weeks.  After 8 weeks, it can also be used for Payroll, Rent, Utilities, Interest on Debt and Working Capital.

Neither loans can be used for:

  • Preplacement of lost revenue
  • Principal on existing debt
  • Refinancing existing debt
  • Capital Improvements

The IRS has recently released Notice 2020-32 which provides guidance regarding the deductibility for income tax purposes of otherwise deductible expenses.  Here is the bottom line of this guidance.

No deduction is allowed under the Internal Revenue Code (IRC) for an expense when that expense way paid by a loan that will be forgiven such as the PPP.   The Coronavirus Aid, Relief, and Economic Security Act (CARES)  excluded the loan from gross income for purposes of the IRC.

For tax planning purposes, there are two significant  steps that a business needs to take to avoid problems on the next tax return.   First, upon receipt of the money, set up an account just for the funds received from the loans.   Do not commingle these funds with other funds. 

There are two  reasons for not comingling. First,  the government has the right to audit the funds to ensure that they are properly used.  The second reason is the afore mentioned lack of deductibility.  When the taxes are completed at the end of the year, having the funds segregated makes it easier to determine which of the normally deductible expenses can be deducted and which cannot.

The second step is to consistently pay expenses from the loan, where appropriate.  This preserves any cash currently in the business.   It also makes tax preparation easier and provides evidence of legitimate deductions in the case of an audit. 

Documentation is the best defense to an audit.   Good recordkeeping is essential in the day to day running of a business and is the best protection when legal questions arise, regardless of the source of those questions.  At Books, Taxes & More, we are ready to help in all aspects of accounting.